CAISSA Quarterly Considerations – 2025 Q2 Recap

Video Transcript

Welcome to CAISSA’s Quarterly Considerations as of the end of the second quarter 2025. We will address a few of the market themes we are watching right now that will drive our investment committee conversations for our portfolios across CAISSA. I’m Kelly Pedersen, CAISSA’s CEO, bringing you this update.

The second quarter of 2025 was marked by a notable shift in the market sentiment, as fiscal and trade policy developments took center stage. One of the developments was Moody’s decision to downgrade U.S. credit ratings, the last one of the major agencies to do that.

Another one of the big market drivers was the Big Beautiful Bill and ongoing tariff discussions, which heightened concerns about the federal budget deficit and contributed to increased volatility of the markets, represented in this chart.

In the light blue, which is the deficit expectations with the bill, and the dark blue as the baseline, you can see that there are heightened expectations of a much bigger deficit than baseline expectations. Additionally, inflation has remained a focal point for our investors. Historically, oil prices in the 10-year Treasury have moved in tandem, but this relationship, as you can see in this red circle here, has really diverged as of late. And that’s a combination of softening demand and increasing supply from OPEC and other countries – the OPEC Plus countries, actually, that have kept oil policies in check, even as inflation expectations have been persisting.

One of the other themes that we’re looking at, of course, has been a theme throughout, central banks, which around the world have continued to chart very different courses, as represented in the chart here on the left.

The Federal Reserve is in the darkest blue right here, up in the top, and it’s held its policy very steady, balancing mixed signals from inflation and the labor market.

In contrast, the UK and Euro area have moved to ease rates, providing a bit of a tailwind for non-U.S. markets and contributing to the US dollar volatility.

Now, despite some of the headlines about potential risks to the dollar’s reserve currency status, the U.S. dollar remains relatively strong by historical standards. As you get a little context, as shown on the right.

We are not far off our 20-year average on the dollar. So, again, with a little context, we’re not so worried about the dollar losing its reserve.

Now, as we relate to fixed income, the Federal Reserve leaving rates unchanged at about 4.25% to 4.5%, they’re maintaining a cautious stance as policymakers assess the economic impact of recent fiscal initiatives.

The Bloomberg Aggregate Index, then, for this year has returned about 1.2% during the quarter, which it was benefiting from a little bit of falling rates, as represented in the chart on the left.

The shift in those lower yields reflected a defensive tone in rates and markets, as the Fed held steady, and the economic backdrop remains a bit uncertain.

Now, on the flip side of that, the Bloomberg U.S. Corporate High Yield Index has a favorable return in the quarter, gaining about 3.5 points.

Although credit spreads are remaining very, very tight, positive fundamentals, strong demand, and a resilient economy support those prices.

And you have to take into account the depreciation of the U.S. dollar and easing monetary policy abroad. They provided an additional boost to non-U.S. dollar-denominated bonds. So, valuations have remained elevated, credit spreads sit near 20-year lows, and very, very tight.

Asset classes. So, regarding these returns, you can see in the… and I’ve marked it with this red circle, equity markets have advanced as a little bit of clarity around trade policy has improved, and investors grew just a little bit more optimistic about the future policy. Large caps, namely AI-related names, led the way. Domestically, the S&P 500 gained ground, about 11% in the quarter, while the Russell 2000, which is small-cap index, gained about… had a return of about 8.5%, again, in this red circle here.

As we move forward into equity markets and talk about sector leadership, it really did, in this area here, if you look at all these different sectors, it did really reflect a risk-on tone, even as macroeconomic signals remained pretty much mixed for the quarter. If you look internationally, I have these circled down here as highlights.

They delivered very strong gains in the second quarter, and it was really helped by a weaker U.S. dollar. European markets rallied on the back of rate cuts, while Japan benefited from some data pointing to economic resilience despite trade pressures.

If you look at the central bank easing in Europe and targeting some economic stimulus in China, those were further tailwinds. MSC IFA rose about 11.8% – that’s an international index that measures international equities. And the MSCI EM index, which is Emerging Markets and Index, gained about 12% in the quarter.

Then we go on to real assets. So, for real assets, equity REITs faced a challenging quarter, with the corresponding index falling about 0.9%, underperforming the broader equity market as investors rotated away from the high valuation sectors, such as residential real estate.

Office and lodging resorts REITs led the performance among property types, but in contrast, single-family rental, healthcare, and timber REITs lagged due to valuation concerns and macro headwinds. And you can see those lagging details here in the REITs.

Commodity also declined, and the Bloomberg Commodity Index was down about 3… a little over 3%, with the losses concentrated in energy, agricultural, and industrial metals. Oil and natural gas.

Prices fell as Middle East tensions eased somewhat, and the demand remained just a little bit tepid. Industrial metals, such as copper, declined on weak demand, and precious metals like platinum and gold actually posted strong returns on ongoing geopolitical uncertainty, and that’s reflected here in this left chart; you can see agriculture being down, energy being down, and industrial metals. Industrial metals are down for the quarter, but up for the year-to-date. So, these… these light blue areas are quarter-to-date, the dark blue areas are year-to-date. So precious metals are losing steam, if you will.

So, that wraps up our quarterly considerations. We hope you enjoy them, and our investment committee is actively assessing these topics. In between quarterly updates, though, please find us at office hours. We answer all of your questions in an open forum for our clients to ask really anything on your mind. So thanks for taking a few minutes out of your day to listen in, and we appreciate it and hope to see you all soon.